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EBF Summary on CEBS Guidelines on Concentration Risk

Core Content

The European Banking Federation (EBF) has provided detailed feedback on the CEBS (Committee of European Banking Supervisors) draft guidelines on concentration risk. The EBF supports the CEBS initiative to establish common standards for concentration risk management across the European Union, emphasizing the importance of clarity, proportionality, and flexibility in the guidelines.

The EBF views concentration risk as a feature of other risk types rather than a distinct risk category, and argues that it should not be treated separately in capital requirements. Instead, it should be integrated into the overall risk assessment framework. The EBF also highlights the need for a joint assessment of concentration risk and diversification, as these are interdependent aspects of risk management.

Main Views

1. Concentration Risk is Part of Overall Risk

• Concentration is not a new risk type but a characteristic within existing risk categories.
• Capital requirements should be calculated in aggregate against all risks, not separately for concentration risk.
• Economic capital models already incorporate concentration through correlations and risk factor sensitivity, making separate reporting difficult.

2. Joint Assessment of Concentration Risk and Diversification

• Concentration risk and diversification should be evaluated together, as they are linked.
• The EBF suggests that guideline 7 should include a reference to the combined assessment of both in the ICAAP (Internal Capital Adequacy Assessment Process).
• The EBF anticipates new CEBS guidelines on capital allocation, which should align with these concentration risk guidelines.

3. Flexibility and Proportionality in Reporting and Implementation

• The EBF supports principle-based reporting and flexible methods for institutions to define their own approaches.
• Additional reporting frameworks are not necessary; risk concentrations can be addressed within existing risk reports.
• Phased implementation is welcomed, with an initial focus on silo-level (credit, market, operational) concentration risk, followed by a firm-wide assessment.

4. Avoiding Over-Regulation and Duplication

• The EBF opposes the idea of assigning additional capital specifically for concentration risk.
• They argue that concentration risk is already captured in portfolio-level risk assessments and that separate capital charges would lead to duplication.
• Supervisors should ensure that concentration risk is not misinterpreted as requiring additional capital, but rather as a component of overall risk profiling.

Key Points of Specific Comments

Guideline 1

• Concentration risk should be addressed in governance and risk management frameworks.
• Materiality should be determined by the institution, not by external standards.
• Concentration risk should be reported at the consolidated level for large banking groups.

Guideline 3 and 4

• Stress testing is an effective tool for identifying concentration risk.
• Supervisors should recognize the difficulty in quantifying inter-risk concentrations and allow for qualitative and expert judgment-based approaches.
• The EBF suggests removing the requirement to price concentration risk in paragraph 27, as it is not part of risk pricing.

Guideline 5

• Formal limit structures should be applied only when appropriate for the institution.
• Key risk indicators (KRIs) are commonly used and serve as an early warning system.

Guideline 6

• Reporting should be integrated into existing risk reports.
• Different approaches (top-down, bottom-up) and levels (consolidated, solo, legal entity) should be left to the institution's discretion.

Guideline 7 and 20

• Concentration risk should be one of several outputs from stress testing.
• The EBF emphasizes the importance of a holistic ICAAP approach that includes all aspects of the bank.
• Additional capital should not be mandated for concentration risk unless all other supervisory steps have been exhausted.

Guideline 11

• The EBF questions the likelihood that high frequency/medium impact (HFMI) risks would jeopardize an institution's survival.
• They also highlight the need for clarity on whether all principles should be applied or only those relevant to the institution's business model.

Guideline 12

• Operational risk concentration should be assessed using appropriate tools, such as KRIs.
• UK banks have established systems for this, including risk committees and stress testing.

Guideline 14

• New liquidity measures introduced by the Basel Committee and some jurisdictions are relevant to concentration risk.
• Supervisors should ensure uniform application of these measures and avoid disadvantaging institutions based on their supervisor.

Guideline 17

• Qualitative analysis is as important as quantitative metrics in risk assessment.
• Comparisons should consider business models and involve discussions with management.

Guideline 18 and 19

• Supervisors already have the authority to require additional capital or liquidity buffers under the CRD (Capital Requirements Directive).
• Additional capital should not be the only tool for mitigating concentration risk; it should be used only after a thorough supervisory review process.

Guideline 21

• The EBF supports the idea of a balanced view in assessing focused activities.
• They emphasize the importance of distinguishing between cross-border banks and smaller institutions, and avoiding unnecessary pressure for diversification that may not be relevant to niche operators.

Conclusion

The EBF advocates for a comprehensive, flexible, and proportionate approach to concentration risk management, emphasizing the integration of concentration risk within existing risk frameworks and the importance of qualitative analysis. They caution against over-regulation and the assignment of separate capital charges for concentration risk, and urge CEBS to ensure consistency and clarity in the guidelines.